Easing your way into retirement (on your own terms)

Switching from hospital administration to special projects has left Kathy Frederick with more free time for her outings with her husband, Mike.

(MONEY Magazine) -- At age 60, Kathy Frederick routinely put in 50 hours a week as a hospital administrator for Scripps Health Systems in San Diego. She managed a 15-person staff, and regularly took work home on week-ends -- until one day five years ago she decided enough was enough. "I wasn't ready to retire," says Frederick, "but after 18 years at that pace, I wanted a different challenge and more time for myself."

So Frederick worked with her boss to create a new role for herself at Scripps as a special-projects manager, which allowed her to gradually downshift her hours to her current two-day-a-week schedule. Frederick is thrilled with the change, which she's found reenergizing. "I'm still valued," she says, "but I get to work on my own terms."

Frederick is one of a growing number of fifty- and sixtysomethings who aren't ready to quit work but would like to cut back -- in fact, four out of 10 people 50 and older say they'd like to gradually reduce their work hours as they age, according to an AARP survey.

Some love what they do but are tired of the hectic pace and long hours. Others would be happy to bid the job adios but can't afford to give up a regular salary, benefits, or the chance to build a bigger nest egg. Employers are warming to the idea of workers phasing in retirement, too, since it allows them to save money on some of their longest-tenure (read: most expensive) staffers without losing that expertise entirely.

Sound appealing? Whether easing up at work makes sense for you depends on your finances -- Can you afford to live on less now? Will it hurt your retirement lifestyle later? -- and also on the nature of your work.

To decide, start with a clear-eyed assessment of your prospects. The challenge, if you opt to move ahead, will be to craft a new role that lightens your load without damaging your long-term security.

Know what works

Is your current job doable on a reduced schedule, or can you reinvent your role in a way that will allow you to work at a less pressured pace? And do you work for the kind of employer that will be receptive to the idea?

Those are the first questions to ask yourself. The answers will depend in part on your company's culture and on your standing within the organization -- as well as on your ability to think critically and creatively about your role.

Build on precedent. Your employer probably doesn't have a formal phased-retirement program; few do. But if the company already has other kinds of flexible work options in place -- part-time schedules, say, or telecommuting arrangements -- you can model your proposal on them. A variation on a working arrangement that managers are familiar with and know can succeed will get a better reception than a concept they've never heard of.

That's the approach taken by Ken Bottoms, a compensation executive at First Horizon National, a financial services company in Memphis, who decided he wanted to cut back at work three years ago.

"I enjoyed my job, and there were still things I wanted to accomplish, but I didn't feel I needed to be in the office five days a week to do them," he says.

Although First Horizon didn't have a formal program for transitioning to retirement, the company did allow employees who were caring for children or older relatives to work as little as 20 hours a week and still retain full benefits.

So Bottoms, now 66, used that blueprint to work out a deal to gradually downshift from 40-plus hours a week to 30, working on special projects as he handed off responsibilities to his eventual replacement. The transition enabled Bottoms to keep health benefits until he qualified for Medicare, hold off taking Social Security until full retirement age, and get his financial house in order (he and his wife paid off their mortgage and downsized to a smaller home) before quitting work for good last fall.

Leverage your position and skills. If your job involves being part of a team, project work, or shift work (the way many health care professionals are scheduled, for example), you may have a leg up, because it's easier to peel away some responsibilities. Your boss may also be more eager to accommodate you if the company has a large number of highly skilled, hard-to-replace staffers (like engineers, scientists, or long-tenure workers).

"Companies would rather develop a new role to hang on to their most valued employees than have them walk suddenly out the door," says Alan Steinberg, a partner in Aon Hewitt's retirement practice.

Case in point: Aerospace Corp., a nonprofit in El Segundo, Calif., that provides technical and scientific research for federal government agencies. Mindful that the average age of its employees is 51 and that a third of the staff is eligible for retirement, Aerospace has approved phased-retirement plans for about 10% of its 3,900-strong workforce.

"It's a way for us to keep technical knowledge that would be hard to replace quickly," says HR general manager Charlotte Lazar-Morrison.

One beneficiary of that policy is engineer Grant Aufderhaar, 63, who until last spring was Aerospace's director of technology. After 18 years with the nonprofit, Aufderhaar gave up his title and full-time position and now takes on only special assignments, most recently a technology-investing plan. He retains an office and health benefits, but puts in just a fraction of his former hours. "I'm working on projects with real impact, and I'm still being asked my opinion, which is nice," says Aufderhaar.

Know your personal value. No one is going to cut you a special deal if you're not highly regarded -- mere competence won't cut it; you need to be a real standout.

A study by Robert Hutchens for the Center for Retirement Research at Boston College confirms the factors that make employers more willing to say yes to a phased retirement proposal: long service (10 years or more); a reputation for being productive; and a work style that needs less supervision than most.

Sure it sounds great to work less. But can you really afford to take a pay cut in your peak earning years? The last thing you want is to lighten up now only to learn later on, when full-time work may no longer be an option, that doing so undermined your financial security.

Give living on less a test run. In the standard phased-retirement arrangement, your salary will be prorated for the hours you work. So if you go from putting in five days a week to four, say, you'll earn 80% of your salary.

You can play with the numbers on paper all you want, but to really know whether you can swing it, there's no substitute for trying to live on that lower salary for a while -- before you make a move at work that may not be reversible, says Dallas financial planner Richard Jackson.

That exercise was an eye-opener for Kathy Heatherton, who went through it six years ago. At the time Heatherton, then 62, was a vice president at a construction trade association in Des Moines, earning $75,000 a year, and her desire to go from full-time to three days a week would have cut her pay by 40%. Worried about whether she and her husband, Mike, a retired postal worker, could get by on that pay (plus his pension and his Social Security), Heatherton sought help from a financial planner. His advice: Reduce spending ahead of time to see if they could swing it.

So the Heathertons created their first budget, cutting back on items like vacations and clothes, and then lived on that lower income for a year before deciding they could indeed manage if Kathy downshifted. (The hardest part: "Giving up going out to lunch with friends at work.") Says Heatherton, who switched to working in quality assurance to accommodate her new schedule: "I would never have had the confidence to do this unless we lived it first."

Don't sweat saving less. A lower salary likely means that your 401(k) contributions will also fall -- that is, if you can afford to save at all. That needn't be a deal breaker.

Reason: Most of the growth in your account value in the past few years before retirement comes from the compounding of earnings on money you've already invested, not from new contributions. "Reducing savings during the transition years is far less of a problem than starting to draw down your savings," says Christine Fahlund, a senior financial planner at T. Rowe Price.

Indeed, a study by T. Rowe found that an employee who earned $100,000 a year and shifted from five to four days a week at age 60, resulting in a 20% cut in salary and retirement savings, would end up with virtually as much retirement income as someone who works full-time to 65 -- as long as that employee doesn't have to start taking Social Security benefits or tapping savings to make ends meet.